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A genuine classic.

Mancur Olson starts with a three chapter summary of his “Logic of Collective Action,” where he explained how stability breeds special interest groups (e.g. cartels, guilds, unions, oligopolies etc.) and how those groups acquire influence in an economy. Some of the most basic observations are

1. Bargaining power will never be perfectly symmetric, i.e. there will be winners and losers;

2. The longer the period of stability, the more these special interests will flourish;

3. Smaller groups can organize better than bigger ones;

4. Cartels are bad for growth;

5. Smaller ones are worse than big ones (for example a union that represents every worker must in the end take account of what’s good for society at large, but a small one needn’t);

6. These “Distributional Coalitions” slow things down because they only have one or two levers to pull and must satisfy the needs of all their members,

6b. the easiest lever to control is price, because it’s observable, rather than quantity;

7. Special interest groups fight progress that might make them redundant;

8. In order to form, cartels must include everybody who can produce a good / provide a service, but then they concentrate on excluding everybody else;

9. As these special interest groups accumulate they make the economy and society progressively unworkable.

Armed with these basic findings from “The Logic,” Olson takes you on a truly amazing voyage where he applies the lessons learnt. He runs all the regressions you’d ever need to convince yourself that US states that joined the union later are growing faster than those which joined earlier because the various “coalitions” like unions and lawyers have had less time to organize. He compares the growth of rich countries and demonstrates that the UK is suffering growth-wise because its polity has been uninterrupted for the longest time. (Thatcher had only been in office for 3 years when he wrote this!) Japan and Germany, on the other hand , grew the fastest post-war and that could well have had something to do with the fact that their militaristic pre-war governments first quashed anything resembling a “special interest,” while the US occupations subsequently levelled the political playing field. He moves on to the success of the European Union in tearing down trade barriers, with all the economic benefits it reaped, and laments that this was more of a coincidence than anything else, since he is not aware of a single case where trade barriers were not torn down by a separate political reason. (the book pre-dates NAFTA) So, for example, the EEC (the precursor of the EU) was founded to prevent another Franco-German war and to provide a counterweight to the superpowers, trade was but the excuse. From there he moves on to explain the motives for primogeniture in European nobility, the formation of castes in India and apartheid in South Africa: a group enacts an exclusionary practice to preserve a privilege, and as time goes by the practice gets progressively stricter, as the gradient of privilege between insiders and outsiders increases.

And so on.

I now understand 1948-1981 Greece ten times better. I understand why we used to make washing machines in Greece, why we established distilleries and alumina smelting facilities in some of the most beautiful settings on earth (ancient Eleusis and Delphi) and why I was limited to USD 250 of hard currency per trip. Rather than do the right thing and develop from scratch industries that took advantage of my country’s unique location, the lazy upper class imported already existing business models from abroad, protected itself with massive tariffs and made sure we normal people did not have the ability to buy foreign products. So when we got the double whammy of EEC entry and borrow-and-spend “Socialists” in 1980 and 1981 our goose was well cooked. I had always known that the socialists took us from 18% debt/GDP in 1980 to 85% by 1985, all wasted on building “Sweden on the Aegean,” but now I also understand why all pre-existing business disappeared in less than half a decade, leaving us all dependent on the largesse of our government and its international sponsors. It is unlikely we will ever recover. Sigh!

The book ends with the author’s best shot at explaining the problem of his times, stagflation. In short, all the various cartels, guilds, unions etc. end up setting the prices for their products and their sweat above what would otherwise be the market-clearing price. If the economy is doing better, this mispricing becomes less unjustified, but if the economy is doing worse (for example subsequent to a shock to relative prices which leaves everybody in an economy poorer, like the one caused by OPEC) then the mispricing becomes even worse. So the misallocation of resources is less egregious when prices go higher than when they go lower. So the “natural” drift in prices, the one that hurts the least, is upwards. So when nominal income for the economy goes down, the more natural way to take the hit is via quantity, rather than price. A la limite, and as the powerful lobbies push their own agendas increasingly harder, you could even observe rising prices. And from that he concludes that “the best macroeconomic policy is good microeconomic policy.” Stop protecting your local industry from foreign competition, force companies to compete with each other in the marketplace, force the workforce to get rid of restraints on new entrants and the macroeconomy will take care of itself. IS ANYONE LISTENING?

So this was overall an amazing read. What I most enjoyed, however, was the continuous torrent of pithy one-liners that flow so effortlessly off of Olson’s pen. My favourite: “evolution also happens in the zoo, not only in the jungle.” Wow!

Read information about the author

American economist and social scientist who, at the time of his death, worked at the University of Maryland, College Park. Among other areas, he made contributions to institutional economics on the role of private property, taxation, public goods, collective action and contract rights in economic development. Olson focused on the logical basis of interest group membership and participation. The reigning political theories of his day granted groups an almost primordial status. Some appealed to a natural human instinct for herding, others ascribed the formation of groups that are rooted in kinship to the process of modernization. Olson offered a radically different account of the logical basis of organized collective action.In his first book, The Logic of Collective Action: Public Goods and the Theory of Groups (1965), he theorized that “only a separate and ‘selective’ incentive will stimulate a rational individual in a latent group to act in a group-oriented way”; that is, members of a large group will not act in the group's common interest unless motivated by personal gains (economic, social, etc.). He specifically distinguishes between large and small groups, the latter of which can act simply on a shared objective. Large groups, however, will not form or work towards a shared objective unless individual members are sufficiently motivated.In 1982, he expanded the scope of his earlier work in an attempt to explain The Rise and Decline of Nations. The idea is that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions will have the incentives to form lobby groups and influence policies in their favor. These policies will tend to be protectionist and anti-technology, and will therefore hurt economic growth; but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the "Logic" dictates that there will be little public resistance to them. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline. Olson's idea is cited as an influence behind the Calmfors-Driffill hypothesis of collective bargaining.In his final book, Power and Prosperity, Olson distinguished between the economic effects of different types of government, in particular, tyranny, anarchy and democracy. Olson argued that a "roving bandit" (under anarchy) has an incentive only to steal and destroy, whilst a "stationary bandit" (a tyrant) has an incentive to encourage a degree of economic success, since he will expect to be in power long enough to take a share of it. The stationary bandit thereby takes on the primordial function of government - protection of his citizens and property against roving bandits. Olson saw in the move from roving bandits to stationary bandits the seeds of civilization, paving the way for democracy, which improves incentives for good government by more closely aligning it with the wishes of the population.

Reviews of the The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities